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What might happen if you were unable to work for an extended period of time? For most of us, it would be very difficult to find the money to keep up the current standard of living. Today I have a guest post written in collaboration with Taisha Betz, an Independent Financial Planner at Continuum Wealth Ltd, explaining the value of having income protection insurance in place.
Here is what I am often told:
“I don’t get ill”
“I will keep working even if I am ill”
“My company can pay me dividends if I am ill”
“We will live on less”
Why do we resist protecting ourselves? Most of us hold car insurance and home insurance as standard. Is it because financial advisers and insurance companies have done a bad job of explaining how income protection insurance can help or is there something else going on?
None of us like to think something bad will happen, and I think many don’t want to talk about it for fear of something happening (that has been me on occasion). But being an adult is making sure that we protect ourselves and everyone dependent on us.
Many people think financial advisers only talk to people with money. It isn’t true. We often are talking to people who are ill, or their family members come to talk about how they can help them.
For example, Jack, who is a 35 year old living on his own on a good income had a car accident one night driving home from work, and is unable to work for the next 3 years. As he wasn’t at work, finding the money to live is his responsibility. State benefits do not come close to his previous income. He is forced to move home with his parents and they take care of him, spending their pension savings to do so.
Reading the newspaper this morning, I read about Gill and Joe Hammond. Joe was diagnosed with motor neurone disease at 48. He was a stay at home dad, and Gill was the main family earner. Joe has written a book called A Short History Of Falling sharing his story. One of their major stresses was financial when their London flat didn’t sell quickly, and they were running out of money.
Unfortunately bad things do happen.
None of us want anyone having to turn to charity, GoFundMe pages, payday loans or lose their homes.
By understanding the impact of not putting in place a safety net, it can help you make decisions on how to address it. For many people, there is a straightforward answer available. It is called income protection, and if you have never heard of it, or are unsure if you have it, please read on.
Income Protection – A Part Of Your Safety Net
Income Protection insurance pays out a regular income in the event that you can’t work due to illness, disability and permanent disability, and in some cases unemployment.
There are two types of income protection cover available:
- Income protection: previously also known as permanent health insurance (PHI). This pays out until a fixed age, death or the return to work.
- Short term income protection: also known as accident, sickness and unemployment cover (ASU). This pays out for a maximum payment period, which is normally between 12 and 24 months.
Many people have some sort of income protection provided by their employer, but it may be for a limited period of time and may not pay the full amount of your take-home earnings. Most of us change jobs or become self-employed, sometimes frequently, in which case that cover might cease or be a lower coverage.
Income protection could be bought by a parent for adult children, giving them support when it is needed, and is also available for stay at home parents. It is suitable for self-employed and contract workers whose income can stop immediately.
If you are an employer, income protection currently represents one of the best products for someone with a pre-existing condition including mental illness.
If you are an employee, working for an employer that offers this is one of the best ways to ensure peace of mind, if you have pre-existing conditions, including mental health issues.
How Do You Find A Suitable Income Protection Policy?
With a financial adviser, you complete a questionnaire providing details on your age, occupation, salary, and health details, including how much cover you need and until what age. It will ask if you are a climber, skier or mountain biker for example to ascertain your activity levels.
Think about your monthly spend. It is important to consider how many weeks you can wait for the first payment. For example, can you wait 6 months (using emergency funds) before an income payment would be made?
A suitable policy will cover your monthly outgoings, be affordable considering your health status and level of benefit, and should cover you if you cannot work in your own occupation.
How Does An Income Protection Policy Pay Out?
Income protection pay-outs are usually based on a percentage of your income, with 50% to 70% being common. The policy will only pay out when the policyholder’s income is reduced or ceases. It isn’t designed to pay a benefit, if the policyholder continues to receive their full gross salary from their employer.
Payments are tax-free, unless arranged through your employer, in which case they’re paid as taxable earnings.
Income protection policies only pay out once a pre-agreed waiting time has passed, generally ranging from 1 to 12 months after a claim is made.
For short term income protection, the benefit can be payable for between 12 and 24 months. The deferral period on short term IP is normally 1 month. Cover is normally against accident, sickness or where the client becomes unemployed through no fault of their own.
The market for these policies is continuing to change as medicine and treatments develop. If you have an older policy, you should be reviewing its ongoing suitability and an independent financial adviser is best placed to do this for you.
The Cost of Income Protection Premiums
Income protection premiums are paid monthly until the end of your policy. Your cover can increase in line with inflation or at a fixed rate – but that premiums will increase accordingly, usually at a faster rate.
It does become more expensive as you get older, but your risk of becoming ill is also higher. Any future policy you might take out will be subject to the state of your health at that time, so, if you think you will need cover in the future, you should consider applying now – and definitely before you are 50!
A financial adviser will typically receive a commission from the protection provider, helping you get it in place without initial fees.
Reviewing Your Policy Regularly
Years pass quickly and changes in your life mount up, so it is vital to keep reviewing your policies each year to ensure that they remain suitable for you.
Income protection is designed to help people achieve financial resilience, peace of mind, and improved physical and psychological wellbeing. If you’d like to explore more with Taisha, you can contact her at [email protected].
This post was written in collaboration with Continuum Wealth Ltd. Taisha Betz transitioned to financial planning from the high tech world of sales when she felt it more important to talk pensions and protection to her team than sales numbers. She is focussed on helping clients learn how to build wealth and protect their families. She is a mum to teenagers and lives in Maidenhead, Berkshire.